On Feb. 20, 2008, President Bush signed into law HR 5140, the Economic Stimulus Act of 2008, which, among other things, includes an additional first-year depreciation deduction equal to 50 percent of the adjusted basis of a new vehicle. This temporary change to the federal tax code requires that all vehicles and other fixed assets be purchased and put into use by Dec. 31, 2008. During this period, a business may take an additional first-year bonus 50-percent depreciation deduction on purchased assets plus the normal first year depreciation deduction (20 percent for 5-year assets) on the remaining net cost.
The 50-percent bonus depreciation is deductible for both regular FIT and AMT. “The hope is that by allowing higher write-offs than normal for purchases this year, it will act as a business stimulus,” said Bill Bosco, a consultant to the leasing industry. “Existing tax law allows companies to write off the cost of a vehicle over a five-year period on an accelerated basis, but now the IRS is letting fleets write it off even faster.”
The 50-percent first-year bonus depreciation in HR 5140 has a sunset provision of Jan. 1, 2009. However, if there is a pre-existing binding contract for future vehicle acquisitions that was entered into prior to Jan. 1, 2008, then vehicles acquired in the 2008 calendar-year will not be eligible for the 50-percent bonus depreciation deduction.
Another HR 5140 temporary tax code change is to allow small businesses, under Internal Revenue Code Section 179, the ability to use an expense deduction for any equipment put into use by Dec. 31, 2008 costing up to $250,000. “Previously, the limit was $128,000,” said Bosco. “The hope is that small businesses will acquire equipment in 2008 with the idea that they can deduct the entire amount up to $250,000.”
The expense deduction phases out to zero for annual equipment purchases exceeding $800,000.
Fleets are Overtaxed
This is the second time this decade that first-year bonus vehicle depreciation has been used as an economic stimulus. In March 2002, after 9/11, Congress passed HR 3090, known as the Economic Security and Recovery Act of 2001, which provided a 30-percent bonus depreciation for a three-year period. In May 2003, the Jobs and Growth Tax Relief Reconciliation Act increased this first-year bonus depreciation to 50 percent. This temporary change in the tax code expired on Jan. 1, 2005.
As in past years, critics argue that today’s 50-percent bonus depreciation will not substantially benefit commercial fleets in the long run because it is quickly recaptured when a vehicle is remarketed. If you resell an asset fairly rapidly, as do commercial fleets, you give back the bonus depreciation in the form of recapture. One consequence will be fleets moving their spring buy forward to a fall buy to take advantage of the bonus depreciation. The strategy will be to take delivery close to the end of CY 2008 to maximize the depreciation benefit. Another beneficiary of the 50-percent bonus depreciation provision will be companies with long-life assets. If a company has a 20-year asset, for instance, it keeps the depreciation for a longer time than does a company that operates a fleet of light-duty vehicles, which are sold, on average between 30-48 months.
Enact a Stimulus that Stimulates
The more fundamental problem is that current Internal Revenue Code assigns business-use passenger cars to a class life of three years and a property recovery class of five years. This was the result of the modified accelerated cost recovery system (MACRS), created by the Tax Reform Act of 1986. The five-year depreciation recovery period for business-use vehicles is inherently unfair to the owners of fleets, regardless of whether they own or lease their vehicles. Prior to the Tax Reform Act of 1986, depreciation of a business-use passenger car was based on a three-year recovery period. The 1986 law extended the recovery period, by requiring full depreciation to be spread over five years (in reality, with the ½ year convention, the full depreciation period is spread over six years). This extended recovery period is costly to fleets. Vehicle depreciation continues to be the single largest fleet expense, representing approximately 40 percent of total lifecycle costs.
In essence, the 1986 law overcharges fleets on taxes and substantially increased the cost of providing vehicles to company drivers. This argument was validated by the government in two separate depreciation studies on business-use cars and light-duty trucks, which were performed by the U.S. Treasury Department in 1991. However, in an era of deficit spending, the tax law was never changed because the source of offsetting revenues could not be agreed upon.
Since 1986, there has been a “lifecycle creep” as vehicles have been kept in service for longer and longer periods. One of the factors favoring this is the current depreciation regulations. Each year, approximately 800,000-plus commercial fleet vehicles are acquired by corporate America. Changing vehicle depreciation rules to a shorter recovery period would be stimulative to the overall economy. It would provide a long-term boost to the auto industry by allowing fleets to adopt faster vehicle replacement cycles. A shorter fleet cycle will result in lower operating expenses and higher resale values since fleets will be operating newer vehicles. A revised depreciation schedule for business-use passenger cars to a three-year recovery class would end the unfair financial burden placed on corporate fleets. This is not only an argument about fairness, it is also an argument that makes economic sense.
Let me know what you think.